Edited version of private ruling

Authorisation Number: 1011597535919

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Ruling

1. Will the Commissioner confirm that the Foundation's current PBI status allows it to proceed with the funding in the way contemplated by the Memorandum of Understanding and without any tax consequences to the Foundation or its donors?

No.

2. In the event that the Commissioner does not approve the Foundation's current PBI status if it proceeds with the funding contemplated by the Memorandum of Understanding:

· will the Commissioner confirm that the Foundation will not be assessed on any income received by it in previous income years, including the levying of any shortfall penalties and/or general interest charge and/or shortfall interest charge?

Yes.

· will the Commissioner confirm that any deductible donations made by its donors in the past to the Foundation will not be denied, including the levying of any shortfall penalties and/or general interest charge and/or shortfall interest charge?

No - the donors are not rulees.

3. In the event that the Commissioner does not approve the Foundation's current PBI status as referred to in Question 1 above, will he approve the transfer of assets and property from the Foundation to a new private ancillary fund (PAF)?

Yes.

4. Where approval for the transfer referred to in Question 3 is granted by the Commissioner and the transfer proceeds, will the Commissioner confirm that the transfer will not give rise to a taxation liability for the Foundation (for example, a capital gain) or to the new PAF on receipt of such assets and property?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2004

Year ended 30 June 2005

Year ended 30 June 2006

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commences on:

1 July 2003

Assumptions:

This ruling is based on the following assumption that the proposed PAF will apply for, and be entitled to, endorsement as both a deductible gift recipient and income tax exempt fund.

Relevant facts and circumstances:

The Foundation has applied for a private ruling concerning the effect of the proposed activities of the Foundation on its current public benevolent institution (PBI) status. If the proposed activities are not appropriate for a PBI, the Foundation wishes to seek approval to allow the transfer (the Transfer) of assets and property from the Foundation into a new PAF.

Background

The Foundation was set up prior to 2005. Under its object clause the Foundation is established to operate for the purpose of providing direct relief of poverty, distress, misfortune, destitution or helplessness or suffering of persons in Australia who are in necessitous circumstances. Its specific purpose is to make provision for the needs of primary and high school students who would not otherwise be able to afford basic costs associated with their education, such as the provision of books, uniforms and equipment and the provision of meals during school hours.

The Foundation was set up for children to provide direct relief from poverty, distress, misfortune, destitution, helplessness or suffering who are in necessitous circumstances, through education. The Foundation's directors maintain a view that the poverty suffered by children may be fundamentally alleviated through education and that education is the vehicle or means by which the poverty suffered by these children can be alleviated.

Given the nature of the Foundation's objects, it sought PBI status from the Commissioner. The status was granted by the Commissioner. As a result, of its PBI status the following tax concessions apply:

(a) Deductible Gift Recipient (DGR)

(b) Income tax exemption

(c) Goods and Services Tax (GST) concession, and

(d) Fringe Benefits Tax (FBT) exemption.

The Foundation has not taken advantage of its FBT exemption or GST concessions.

The Foundation entered in to a Memorandum of Understanding (MOU) with the State Minister of Education and Minister for Children and Early Childhood Development (the Departments) for the construction of a school and Children's Centre in a significantly underprivileged area (the School Project), where there were significant numbers of indigenous, migrant and refugee families.

Under the Partnership, the Foundation will provide funding to help build the new school and deliver ongoing financial assistance in pursuant to the MOU.

The Foundation and the Department intend to work co-operatively together for the purpose of establishing and operating a school that maximises opportunities for its students whose ability to access high quality education would otherwise be limited.

At the time of entering into the MOU, the Foundation believed that its status as a PBI was appropriate to it pursuing the School Project. The ATO then advised the Foundation that it was of the view that the activity of supporting a government initiative is not considered to be benevolent. As a result, and in light of undertakings made by the Foundation under the MOU, the Foundation intends to:

(a) wind up the Foundation, and

(b) transfer all of its assets and property into a new private ancillary fund (PAF).

The transfer of assets and property from the Foundation will enable the new PAF to support projects related to the education of underprivileged children, and, in particular, to the construction of, and ongoing funding to, a school assisting in the education of disadvantaged children.

Reasons for decision:

Question 1

Will the Commissioner confirm that the Foundation's current PBI status allows it to proceed with the funding in the way contemplated by the Memorandum of Understanding and without any tax consequences to the Foundation or its donors?

The expression 'public benevolent institution' is not defined in the Income Tax Assessment Act 1997 (ITAA 1997) but the definition has been considered by numerous court cases. The essential characteristics of a PBI were described in the High Court in Perpetual Trustee v. Federal Commissioner of Taxation (1931) 45 CLR 224. Starke J, at 45 CLR 232 said that 'public benevolent institution', in ordinary English usage means, an institution organised for the relief of poverty, sickness, destitution or helplessness. Dixon J at 45 CLR 233-234 said it should include the relief of poverty, suffering, distress or misfortune.

Evatt J further said at 45 CLR 235-236:

Such bodies vary greatly in scope and character, but they have one thing in common: they give relief freely to those who are in need of it and who are unable to care for themselves. Those who receive aid or comfort in this way are the poor, the sick, the aged and the young. Their disability or distress arouses pity, and the institutions are designed to give them protection.

Taxation Ruling TR 2003/5 Income tax and fringe benefit tax: public benevolent institutions provides the Tax Office's view on what constitutes a PBI. Paragraph 7 and 8 of TR 2003/5 states:

A public benevolent institution is a non-profit institution organised for the direct relief of poverty, sickness, suffering, distress, misfortune, disability, destitution or helplessness as arouses compassion in the community.

It is not sufficient that an organisation is 'benevolent' in merely dictionary terms, that its actions are socially worthwhile, that it is charitable in legal terms or that it is fully funded by government.

Paragraph 68 of TR 2003/5 further provides the following explanation:

Organisations which could be described as 'benevolent' in terms of dictionary definition will not necessarily be public benevolent institutions. Dixon J said in the Perpetual Trustee case at 45 CLR 233 that 'the word "benevolent" does not [in the statutory context under consideration] posses its general descriptive meaning'. Also, the phrase 'is to be treated as a compound expression' (per Dixon J in Public Trustee (NSW) v. FC of T (1934) 51 CLR 75 at 103) and 'should not be construed by piecing together the respective meanings of the three words of which it is composed' (per McTiernan J in Perpetual Trustee at CLR 240).

As suggested by TR 2003/5, the definition of 'benevolent' is only to be applied to an institution that is established for the direct relief of the conditions described above, which arouse compassion in the community. A PBI must operate for charitable purpose, but having a charitable purpose on its own does not necessarily indicate that an institution is a PBI.

Taxation Ruling TR 2005/21 Income tax and fringe benefits tax: charities provides the Tax Office's view on what constitutes a charity and the technical legal meaning of 'charitable'. Relevantly, paragraph 21 refers to governmental purposes as one of the categories of purpose which are not considered to be charitable. Paragraph 135 of the ruling further explains that governmental departments and organisations are unlikely to be charitable institutions because they are simply performing a governmental responsibility.

As stated in the MOU, the Foundation has undertaken to assist in the construction of a school with a Children's Centre and provide on-going financial assistance. The construction of a government school is clearly a governmental responsibility, therefore funding the School Project is inconsistent with the Foundation's charitable purposes. Since the Project is not charitable, it cannot be accepted as 'benevolent'.

As a result, the Foundation's current PBI status does not allow it to proceed with the School Project funding in the way contemplated by the Memorandum of Understanding without tax consequences. The Foundation will cease to be entitled to PBI status if it proceeds with this arrangement.

Donors to the Foundation are not Rulees and therefore can not be subject to, or rely upon, binding advice issued in a private ruling issued to another taxpayer.

Question 2

In the event that the Commissioner does not approve the Foundation's current PBI status if it proceeds with the funding contemplated by the Memorandum of Understanding:

1. will the Commissioner confirm that the Foundation will not be assessed on any income received by it in previous income years, including the levying of any shortfall penalties and/or general interest charge and/or shortfall interest charge?

2. will the Commissioner confirm that any deductible donations made by its donors in the past to the Foundation will not be denied, including the levying of any shortfall penalties and/or general interest charge and/or shortfall interest charge?

It is not intended that the Foundation's income tax exempt status as a charitable institution will be retrospectively revoked. Therefore, it will not be assessed on income received by it prior to entering into the arrangement as described, or subject to the levying of any shortfall penalties and/or general interest charge and/or shortfall interest charge in respect to income derived by it.

The DGR endorsement of the Foundation will not be retrospectively revoked as a result of it entering into the MOU to assist in the construction of a school and Children's Centre and provide on-going financial assistance to the school. Donors to the Foundation are not Rullese, therefore, comment cannot be made in respect to the tax affairs of persons who are not Rulees for purposes of this private ruling.

Question 3

In the event that the Commissioner does not approve the Foundation's current PBI status as referred to in Question 1, will he approve the transfer of assets and property from the Foundation to a new private ancillary fund (PAF)?

The Commissioner approves the transfer of the Foundation's assets to a PAF established to assist in the construction of a school and Children's Centre and to provide on-going financial assistance to the school.

Question 4

Where approval for the transfer referred to in Question 3 is granted by the Commissioner and the transfer proceeds, will the Commissioner confirm that the transfer will not give rise to a taxation liability for the Foundation (for example, a capital gain) or to the new PAF on receipt of such assets and property?

Based on the information provided, the Foundation will remain entitled to income tax exempt status as a charitable institution until after such time as its assets are transferred to the proposed PAF. Therefore, the Foundation will remain exempt from tax on its ordinary and statutory income and the transfer will not give rise to a taxation liability, including liability in respect to any capital gain resulting from implementation of the proposed arrangement.