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Edited version of private advice
Authorisation Number: 1012645030057
Ruling
Subject: Proposed investment option for the Foundation.
Question
Is the Foundation able to use the scholarship fund to loan funds to the school to enable it to make a proposed acquisition of land without endangering the DGR scholarship fund status?
Answer
Yes
Relevant facts and circumstances
The Foundation operates a scholarship fund which is endorsed as a Deductible Gift Recipient (DGR).
The scholarship fund pays scholarships
The School is proposing to purchase some adjacent land to allow the school to expand.
The Foundation is willing to loan to the school the funds needed to make the proposed acquisition from the scholarship fund.
The terms of the proposed loan are monthly repayment of principal and interest over 5 years with interest to be calculated using a market variable interest rate.
Reasons for decision
The entity is endorsed for a scholarship fund which it operates (the Fund). To qualify as a scholarship fund a fund's governing documents must reflect that the fund is established for the sole purpose of providing money for eligible scholarships, bursaries or prizes. In its operations, the fund must be maintained solely for the required purpose.
A scholarship fund can undertake an investment (including a loan) in order to enable or facilitate the provision of eligible scholarships, bursaries or prizes. Such investment must not be on terms which are less favourable than the terms which may reasonably be expected to apply between parties dealing at arm's length.
A scholarship fund may invest or lend its monies if the administrator of the fund can show that:
• It is proceeding to achieve the fund's purposes; and
• the investments or loans represent a bona fide and temporary arrangement; and
• the investment or loan will assist the fund to achieve its objects within a reasonable period.
Based on the information provided, the school will borrow money from the Fund at market interest rates to assist in the purchase of adjacent land to allow for the future expansion of the school. The scholarship program will not be affected by the loan.
It is considered that the terms of the arrangement are at arm's length. The loan is a temporary arrangement, and the interest earned will assist the Fund to pay scholarships.
We consider that the proposed loan will not affect the DGR endorsement of the Fund as a scholarship fund under section 30-25 of the Income Tax Assessment Act 1997.