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Authorisation Number: 1011899442380

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Ruling

Subject: Exemption from Income Tax - Endorsement as a Deductible Gift Recipient

Issue 1

Question 1

Will the entity continue to satisfy the requirements to be exempt from income tax under item 1.1 of section 50-5 of the ITAA 1997 as a charitable institution should it participate in the development and operation of the facility?

Answer

Yes

Question 2

Will the entity be entitled to exemption from income tax under a particular section of the ITAA 1997 should it participate in the development and operation of the facility?

Answer

No

Issue 2

Question 1

Will the entity continue to satisfy the requirements to be endorsed as a DGR under a particular item of the ITAA 1997 should it participate in the development and operation of the facility?

Answer

Yes

Issue 3

Question 1

Will the entity continue to satisfy the requirements to be entitled to FBT concessions under the FBTAA should it participate in the development and operation of the facility?

Answer

Yes

Issue 4

Question 1

Will the entity continue to satisfy the requirements to be endorsed for concessions under the GST Act should it participate in the development and operation of the facility?

Answer

Yes

This ruling applies for the following period

Income year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

The entity is an incorporated association.

The entity's constitution contains acceptable non-profit, dissolution and wind-up/revocation clauses.

The entity's constitution states that the principal object for which it is established is to carry on and be responsible for the operations of particular facilities and services.

The entity's activities are in support of its objects.

The entity is considering entering into a contract with a third party to develop and operate a particular facility.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 30-20

Income Tax Assessment Act 1997 section 30-125

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-5

Income Tax Assessment Act 1997 section 50-30

Income Tax Assessment Act 1997 section 50-52

Income Tax Assessment Act 1997 section 50-110

Fringe Benefits Tax Assessment Act 1986 section 57A

Fringe Benefits Tax Assessment Act 1986 section 65J

A New Tax System (Goods and Services Tax) Act 1999 subdivision 38-G

A New Tax System (Goods and Services Tax) Act 1999 section 176-1

Issue 1 Question 1

Summary

The entity will continue to be exempt from income tax as a charitable institution under item 1.1 of section 50-5 of the ITAA 1997.

Detailed reasoning

Section 50-1 of the ITAA 1997 provides that the ordinary and statutory income of entities covered by the tables listed in Subdivision 50A of the ITAA 1997 is exempt from income tax.

Item 1.1 in the table in section 50-5 of Subdivision 50A of the ITAA 1997 provides that an entity is an exempt entity if it is a 'charitable institution' and it satisfies the special conditions of sections 50-50 and section 50-52 of the ITAA 1997.

Section 50-52 of the ITAA 1997 provides that an entity covered by item 1.1 is not exempt from income tax unless the entity is endorsed as exempt from income tax under Subdivision 50-B of the ITAA 1997.

Under section 50-110 of Subdivision 50-B of the ITAA 1997 an entity is entitled to be endorsed as exempt from income tax if the entity meets all of the following requirements:

· it has an ABN

· it is a charitable fund or institution covered by section 50-5 of the ITAA 1997; and

· it satisfies the special conditions of sections 50-5 of the ITAA 1997.

a) ABN

To be endorsed as a tax exempt charity, the entity must have an ABN. The entity has an ABN and therefore satisfies this requirement of section 50-110 of the ITAA 1997.

b)  A charitable institution covered by section 50-5 of the ITAA 1997

Although the word 'charitable' is not defined by the ITAA 1997, it has an established legal meaning through case law. Based on common law the characteristics of a charity are:

· It is an entity that is also a trust fund or an institution;

· It exists for the public benefit or the relief of poverty;

· Its purposes are charitable within the legal sense of that term;

· It is non-profit; and

· Its sole or dominant purpose is charitable.

A trust fund or institution

Whether an entity has the character of an institution will depend on a range of features including its activities, size, permanence, purposes and recognition. Incorporation is not enough, on its own, to show and entity is an institution. A charitable institution would not usually include an entity that is established, controlled and operated by family members and friends.

Paragraph 23 of Draft Taxation Ruling TR 2011/D2 Income tax and fringe benefits tax: charities (TR 2011/D2) states:

An institution is an establishment, organisation or association, instituted for the promotion of some object, especially one of public or general utility. It connotes a body called into existence to translate a defined purpose into a living and active principle. It may be constituted in different ways including as a corporation, unincorporated association or trust. However it involves more than mere incorporation, and does not include a structure controlled and operated by family members and friends.

The entity is an incorporated association.

It is governed by its constitution and administered by a managing committee, in consultation with industry experts. The entity actively promotes its objects.

It is considered the entity's activities constitute an institution.

Public benefit or the relief of poverty

Charities exist for the benefit of the community or the relief of poverty. Paragraph 15 of TR 2011/D2 states:

A purpose is beneficial to the community if:

(a) it offers a benefit that is real and of value, either tangible or intangible; and

(b) that benefit is for the public.

Paragraph 16 of TR 2011/D2 states:

The benefit of a charitable purpose need not be for the whole community; it is sufficient that it is for an appreciable section of the public.

The entity meets this requirement.

Charitable purpose

Paragraph 10 of TR 2011/D2 states that for a purpose to fall within the technical legal term of 'charitable' it must be beneficial to the community and within the spirit and intendment of the Statute of Elizabeth.

Paragraph 102 of TR 2011/D2 provides that purposes in the Preamble to the Statute of Elizabeth include the relief of aged, impotent and poor people.

As per paragraphs 12 and 103 of TR 2011/D2, charitable purposes are commonly grouped under the four heads of charity being:

· the relief of poverty;

· the advancement of education;

· the advancement of religion; and

· other purposes beneficial to the community.

TR 2011/D2 provides guidance in respect of these purposes.

The entity's constitution provides the principal object for which it is established is to carry on and be responsible for the operation of particular facilities and services.

It is accepted that the entity has met the charitable purpose requirement.

Sole purpose

To be a charity, the sole purpose of the entity must be charitable.

Paragraph 25 of TR 2011/D2 states that a charitable institution cannot have an independent non-charitable purpose (regardless of how minor that independent non-charitable purpose may be).

Paragraph 26 of TR 2011/D2 states a purpose is the 'main or predominant or dominant' purpose of an institution if any other purpose the institution has is no more than incidental or ancillary to that purpose.

Paragraph 27 of TR 2011/D2 explains that a purpose is incidental or ancillary to a charitable purpose if it tends to assist, or goes naturally with, the achievement of the charitable purpose.

No non-charitable purposes have been identified in respect of the objects or activities of the entity.

The entity satisfies the sole purpose requirement as its purposes are charitable.

Non-profit

Page 6 of Income tax guide for non-profit organisations states:

The basic premise of a non-profit organisation is that it is not operating for the profit or gain of its individual members, whether these gains would have been direct or indirect. This applies both while the organisation is operating and when it winds up.

The Tax Office accepts an organisation as non-profit where its constituent or governing documents prevent it from distributing profits or assets for the benefit of particular people - both while it is operating and when it winds up.

These documents should contain acceptable clauses showing the organisation's non-profit character. The organisation's actions must be consistent with this requirement.

There are two requirements implicit in the statement of non-profit character above. First an entity's constituent document must display a non-profit character. Second, the entity's actions must be consistent with this non-profit character.

The entity's constitution prevent it from distributing its profits or assets amongst members while it is operating or on upon winding up.

It is accepted that the entity is a non-profit association.

As the entity meets the requirement of being an institution, exists for the public benefit, is a non-profit organisation with a sole charitable purpose, it is a charitable institution for the purposes of section 50-5 of the ITAA 1997. It therefore satisfies this requirement of section 50-110 of the ITAA 1997.

c)  It satisfies the special conditions of section 50-5 of the ITAA 1997.

A charitable institution is an exempt entity as per section 50-5 of the ITAA 1997 provided it satisfies the special conditions of sections 50-50 and 50-52 of the ITAA 1997.

Section 50-52 of the ITAA 1997 provides that a charitable institution under Item 1.1 will not be exempt from income tax unless the entity also meets other conditions described in section 50-50 and is endorsed as exempt from income tax.

Section 50-50 of the ITAA 1997 states:

An entity covered by item 1.1 or 1.2 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; or

(b) is an institution that meets the description and requirements in item 1 of the table in section 30-15; or

(c) is a prescribed institution which is located outside Australia and is exempt from income tax in the country in which it is resident; or

(d) is a prescribed institution that has a physical presence in Australia but which incurs its expenditure and pursues its objectives principally outside Australia.

The entity has a physical presence in Australia. The entity conducts its activities and incurs its expenditure in Australia, meaning that it pursues its objectives principally in Australia. As such, the entity satisfies paragraph 50-50(a) of the ITAA 1997.

By meeting the requirements of sections 50-50 and 50-52 of the ITAA 1997, the entity has satisfied the special conditions of section 50-5 of the ITAA 1997.

The entity will continue to be exempt from income tax under item 1.1 of section 50-5 of the ITAA 1997 as a charitable institution.

Issue 1 Question 2

Summary

As the entity is endorsed as a charitable institution, it is not entitled to income tax exemption under a particular provision of the ITAA 1997.

Detailed reasoning

Section 50-52 of the ITAA 1997 sets out the special conditions that must be satisfied for an entity applying for income tax exemption as a charitable institution under item 1.1. Subsection 50-52(1) provides that an entity covered by item 1.1 is not exempt from income tax unless the entity is endorsed as exempt from income tax under Subdivision 50-B.

Subsection 50-52(3) states:

This section has effect despite all the other sections of this Subdivision.

Note: This means that an entity covered both by an item other than 1.1, 1.5, 1.5A, 1.5B or 4.1 and by one of those items is not exempt from income tax unless the entity is endorsed under Subdivision 50-B as exempt from income tax and the entity meets the requirements of whichever of sections 50-50, 50-57, 50-60 and 50-72 is relevant [emphasis added].

The entity is an entity covered by both item 1.1 of section 50-5 and another particular item of the ITAA 1997. Where an entity is covered by the latter item only, it can self-assess its entitlement to income tax exemption. However as per subsection 50-52(3) where an entity is covered by both item 1.1 of section 50-5 and the aforementioned item, the entity must apply to the Commissioner for endorsement.

As the entity is accepted by the Commissioner as satisfying the requirements for endorsement as a charitable institution under item 1.1, it is not entitled to endorsement under another particular item.

Issue 2 Question 1

Summary

The entity will continue to satisfy the requirements for endorsement as a DGR in accordance with a particular item in the ITAA 1997.

Detailed reasoning

Section 30-120 of the ITAA 1997 provides that the Commissioner must endorse an entity as a DGR if it applies for endorsement and is entitled to be endorsed as a DGR.

Section 30-125 of the ITAA 1997 sets out the conditions that an entity must satisfy in order to be endorsed as a DGR.

In accordance with subsection 30-125(1) of the ITAA 1997, an entity that is seeking to be endorsed as a DGR is entitled to endorsement if the following conditions are satisfied:

(a) the entity has an ABN;

(b) the entity is a fund, authority or institution that

o is described in a category set out in item 1, 2 or 4 of the table in section 30-15 of the ITAA 1997;

o is not described by name in Subdivision 30-B of the ITAA 1997;

o satisfies any special conditions for the category in which it is described; and

(c) the entity satisfies the winding up and revocation of endorsement requirements of subsection 30-125(6).

Item 1 of section 30-15 of the ITAA 1997 refers to a fund, authority or institution that is covered by an item in any of the tables in Subdivision 30-B. Item 1 has a special condition that the fund, authority or institution must be in Australia.

It is accepted that the entity meets the requirements of paragraph 30-125(1)(a) and subparagraphs 30-125(b)(i) and (iii).

The entity is not described by name in Subdivision 30-B of the ITAA 1997. Therefore the requirement of subparagraph 30-125(b)(ii) is also met.

Subsection 30-125(6) of the ITAA 1997 requires that an entity's constituent document or governing rules must require the entity at the first occurrence of either winding up the entity, or revocation of the entity's DGR endorsement, to transfer any surplus gifts, property or contributions to another DGR entity.

The entity's constitution meets the requirements of subsection 30-125(6) of the ITAA 1997, and therefore satisfies paragraph 30-125(1)(c) of the ITAA 1997.

As the entity meets all of the requirements of subsection 30-125(1) of the ITAA 1997 and has applied for endorsement, the Commissioner, in accordance with section 30-120 of the ITAA 1997 must endorse it as a DGR.

The entity will continue to meet the requirements for DGR endorsement.

Issue 3 Question 1

Summary

The entity will continue to be entitled to FBT concessions under the FBTAA.

Detailed reasoning

The FBTAA provides that a benefit provided in respect of the employment of an employee is an exempt benefit if certain conditions are met.

The entity will continue to meet the requirements for FBT concessions.

Issue 4 Question 1

Summary

The entity will continue to be entitled to GST concessions under subdivision 38-G of the GST Act as a charitable institution.

Detailed reasoning

Subdivision 38-G of the GST Act provides GST concessions to a supplier that is an endorsed charitable institution.

Subsection 176-1(1) of the GST Act requires the Commissioner to endorse an entity as a charitable institution if it is entitled to be endorsed as a charitable institution and has applied for endorsement.

Subsection 176-1(2) of the GST Act provides that an entity is entitled to be endorsed as a charitable institution if it:

(a) is a charitable institution; and

(b) has an ABN.

The entity is a charitable institution and has an ABN.

The entity will continue to be entitled to GST concessions under subdivision 38-G of the GST Act as a charitable institution.

ATO view documents

Draft Taxation Ruling TR 2011/D2 Income tax and fringe benefits tax: charities

Taxation Ruling TR 2000/11 Income tax: endorsement of income tax exempt charities

Income tax guide for non-profit organisations (NAT 7967-03.2007)

Giftpack (NAT 3132-04.2011)

Other references (non ATO view, such as court cases)

Commissioner of Taxation v. Word Investments Limited (2008) 236 CLR 204