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Ruling

Subject: Eligibility for charitable institution status when property is rented to members and unrelated parties

Issue 1

Question 1

Will the income tax exempt status of the Church, as a charitable institution, be affected if the Church rents its premises to a non-related business entity at market rental rates?

Answer

No

Question 2

Will the income tax exempt status of the Church as a charitable institution be affected if the Church rents its premises to a non-related business entity below market rates, or allows the non-related business entity to use the premises for free?

Answer

Yes

Question 3

Will the income tax exempt status of the Church, as a charitable institution, be affected if the Church rents its premises to a related business entity (owned by members of the Church) at market rates?

Answer

No

Question 4

Will the income tax exempt status of the Church, as a charitable institution, be affected if the Church rents its premises to a related business entity below market rates, or allows the related business entity to use the premises for free?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commences on:

1 April 2011

Relevant facts and circumstances

The Church is endorsed as a tax concession charity - charitable institution.

The Church has been approached by an educational provider wishing to hire their premises on a weekly basis.

The Church requires information on whether renting part of the premises to unrelated parties affects their endorsement as a charitable institution.

The Church has also requested information on whether renting part of the premises to a Church member will affect their endorsement as a charitable institution.

Information on the operations of the Church is available from the Church web site.

The Church is endorsed for the operation of a school building fund.

Assumptions

1. The Church operates for a charitable purpose (the advancement of religion).

2. Rental payments received will be used for the charitable purposes of the Church.

3. The external businesses using Church premises are not charitable organisations.

Relevant legislative provisions

Section 50-5 of the Income Tax Assessment Act 1997

Section 50-50 of the Income Tax Assessment Act 1997

Reasons for decision

Issue 1 Question 1

Summary

The charitable status of the Church (and its income tax exemption) will not be affected by renting Church property to unrelated businesses at market rates. This is because raising funds is in line with the charitable purpose of the Church.

Detailed reasoning

The ATO document Income tax guide for non-profit organisations (NAT7967) provides the characteristics of a charity:

· 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 the term

· It is non-profit, and

· Its sole purpose is charitable

Taxation Ruling TR 2011/D2 Income tax and fringe benefits tax: charities sets out the Australian Taxation Office view on the meaning of 'charitable institution' and 'fund established for public charitable purposes'.

Paragraph 10 of TR 2011/D2 states:

For a purpose to come within the technical legal meaning of 'charitable' it must be:

·  within the spirit and intendment of the Statute of Elizabeth, or deemed to be charitable by legislation applying for that purpose (the charitable purpose requirement); and

· beneficial to the community, or deemed to be for the public benefit by legislation applying for that purpose (the public benefit requirement).

The technical legal meaning of charitable that is applied by Australian courts is one that has been developed by the courts of Australia and other countries with comparable jurisdictions. However, decisions from other countries will only be relevant if they are consistent with the approach of the Australian courts.

Paragraph 15 of TR 2011/D2 states:

A purpose is beneficial to the community if:

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

· that benefit is for the public.

Paragraph 25 of TR 2011/D2 states:

An institution is charitable if:

·  its only, or its 'main or predominant or dominant' purpose is charitable in the technical legal sense; and

·  it was established and is maintained for that charitable purpose.

In this draft Ruling, we typically refer to the required purpose as the 'sole purpose' of the institution because a charitable institution cannot have an independent non-charitable purpose (regardless of how minor that independent non-charitable purpose may be).

The charitable status of the Church (and its income tax exemption) will not be affected by renting Church property to unrelated businesses at market rates. This is because there is no benefit to the business owner (other than use of the premises), and a charity can raise funds to further its charitable purpose.

Question 2

Summary

The charitable status of the Church (and its income tax exemption) will therefore be affected by renting Church property to unrelated businesses at below market rates (or allowing access for free).

Detailed reasoning

The ATO document Income tax guide for non-profit organisations (NAT7967) provides the characteristics of a charity:

· 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 the term

· It is non-profit, and

· Its sole purpose is charitable

Taxation Ruling TR 2011/D2 Income tax and fringe benefits tax: charities sets out the Australian Taxation Office view on the meaning of 'charitable institution' and 'fund established for public charitable purposes'.

Paragraph 10 of TR 2011/D2 states:

For a purpose to come within the technical legal meaning of 'charitable' it must be:

·  within the spirit and intendment of the Statute of Elizabeth, or deemed to be charitable by legislation applying for that purpose (the charitable purpose requirement); and

· beneficial to the community, or deemed to be for the public benefit by legislation applying for that purpose (the public benefit requirement).

The technical legal meaning of charitable that is applied by Australian courts is one that has been developed by the courts of Australia and other countries with comparable jurisdictions. However, decisions from other countries will only be relevant if they are consistent with the approach of the Australian courts.

Paragraph 15 of TR 2011/D2 states:

A purpose is beneficial to the community if:

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

· that benefit is for the public.

Paragraph 25 of TR 2011/D2 states:

An institution is charitable if:

·  its only, or its 'main or predominant or dominant' purpose is charitable in the technical legal sense; and

·  it was established and is maintained for that charitable purpose.

In this draft Ruling, we typically refer to the required purpose as the 'sole purpose' of the institution because 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 states:

A purpose is incidental or ancillary to a charitable purpose if it tends to assist, or naturally goes with, the achievement of the charitable purpose. It does not mean a purpose that is minor in quantitative terms.

Paragraph 28 of TR 2011/D2 states:

A purpose is not incidental or ancillary if it is an end in itself, or of substance in its own right, or if it might happen to further a charitable purpose.

Renting of property to an unrelated business party below market rates (or allowing free use) will result in a benefit accruing to the owners of the business (other than the use of the premises). This is not consistent with the charitable purpose of the Church, which must be for the public benefit.

The charitable status of the Church (and its income tax exemption) will therefore be affected by renting Church property to unrelated businesses at below market rates (or allowing access for free).

This conclusion will not change if a 'donation' is paid by the business to the Church. A private benefit will still accrue to the owners of the business (other than the use of the premises). However, in these circumstances any such payment is unlikely to have the character of a donation.

The Macquarie Dictionary defines the term 'donation' as:

· the act of presenting something as a gift.

· a gift, as to a fund; a contribution.

The term 'donation' therefore has the same meaning as the word 'gift'.

The ATO document GiftPack (NAT3132) provides the following characteristics of a gift:

There is a transfer of money or property

The transfer is made voluntarily

The transfer arises by way of benefaction, and

No material benefit or advantage is received by the donor?

In making a donation the party renting the property will receive a material benefit (use of the premises). The ATO will therefore not consider the payment as a gift.

Question 3

Summary

The endorsement of the Church as a charitable institution (and its income tax exemption) will not be adversely affected by providing property to a related party at market rental rates.

Detailed reasoning

The ATO document Income tax guide for non-profit organisations (NAT7967) provides the characteristics of a charity:

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

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

· Its sole purposes are charitable within the legal sense of the term

· It is non-profit, and

· Its sole purpose is charitable

Paragraph 15 of TR 2011/D2 states:

A purpose is beneficial to the community if:

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

· that benefit is for the public.

Paragraph 25 of TR 2011/D2 states:

An institution is charitable if:

· its only, or its 'main or predominant or dominant' purpose is charitable in the technical legal sense; and

·  it was established and is maintained for that charitable purpose.

In this draft Ruling, we typically refer to the required purpose as the 'sole purpose' of the institution because a charitable institution cannot have an independent non-charitable purpose (regardless of how minor that independent non-charitable purpose may be).

TR 2011/D2 provides information on when purposes are not charitable.

Paragraph 45 of TR 2011/D2 states:

An institution that carries out its activities for the private profit or benefit of its owners or members is not charitable as it cannot satisfy the public benefit requirement. This will be the case even if charitable consequences flow from the institution's activities, or the motivation of the institution has some social value.

Providing property to a related business (a business owned by Church members) at market rental rates does not indicate a benefit is accruing to members of the organisation. The related business will use the premises because they have rented the premises at market rates, and not because they are owned by members. The Church is still seen to be operating for the benefit of the public.

The endorsement of the Church as a charitable institution (and its income tax exemption) will not be adversely affected by such an arrangement.

Question 4

Summary

The charitable status of the Church (and its income tax exemption) will be affected by renting Church property to a related business at below market rents (or allowing access for free).

Detailed reasoning

The Macquarie Dictionary defines the term 'donation' as:

· the act of presenting something as a gift.

· a gift, as to a fund; a contribution.

The term 'donation' therefore has the same meaning as the word 'gift'.

The ATO document GiftPack (NAT3132) provides the following characteristics of a gift:

There is a transfer of money or property

The transfer is made voluntarily

The transfer arises by way of benefaction, and

No material benefit or advantage is received by the donor?

In making a donation the related party renting the property can not receive a material benefit.

The ATO will therefore not see any donation as being payment for property rental.

Paragraph 15 of TR 2011/D2 states:

A purpose is beneficial to the community if:

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

· that benefit is for the public.

Paragraph 45 of TR 2011/D2 states:

An institution that carries out its activities for the private profit or benefit of its owners or members is not charitable as it cannot satisfy the public benefit requirement. This will be the case even if charitable consequences flow from the institution's activities, or the motivation of the institution has some social value.

Paragraph 47 of TR 2011/D2 states:

An institution set up to advance the interests of its members in their capacity as members cannot be charitable as it cannot satisfy the public benefit requirement. The members of such institutions do not, as members, constitute a section of the public in the relevant sense, and the benefits derived by the members are, as a result, private in nature.

As a member is benefitting from renting Church property at below market rates (or for free), the Church is carrying out activities for the benefit of individual members and not for the public benefit.