Edited version of your written advice

Authorisation Number: 1012866427916

Date of advice: 26 August 2015

Ruling

Subject: Special Conditions

Question 1

Will the proposed sale of an entity during the course of winding-up, and the transfer of surplus assets on winding up to an education not-for-profit entity result in the entity breaching section 50-50(2) of the Income Tax Assessment Act (ITAA 1997)?

Answer

No

Question 2

If the entity amends a rule of its Constitution and proceeds with the proposal in question 1 will that result in the entity breaching section 50-50(2) of the ITAA 1997?

Answer

Not required

This ruling applies for the following periods:

1 July 2015 to 30 June 2020

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The entity is a proprietary company that is incorporated.

The entity operates stores within education campuses. The entity is:

a. endorsed as Income tax exempt and

b. registered with the Australian Charities, and Not-for-profits Commission (ACNC) as a charity for the promotion of education

The Constitution states its objects and purposes are, in general terms, to assist students and the associated community in Australia.

The Constitution states:

The assets and income of the Company shall be applied solely in furtherance of its objects and no portion shall be distributed either by way or divided or otherwise directly or indirectly to a Member except as bona fide compensation for services rendered to the Company or expenses incurred on behalf of the Company

The Constitution states:

In the event of the Company being wound up any assets remaining after the Company being wound up, (sic) any assets remaining after the Company's liabilities have been discharged and the costs and expenses of winding up have been paid shall be transferred to another organisation or organisations that:

• has objects similar to the Company's Objects;

• is not carried on for the profit or gain of its individual rnembers, and

• that has rules that prohibit the distribution of its income amongst its members to the extent of the prohibition contained in the constitution.

The education entity is a "not for profit" entity. Its Constitution prohibits the distribution of its income or assets among its members.

It is an association incorporated under an Act.

The education entity has similar endorsements to the entity. It is;

a. endorsed as Income tax exempt, and

b. registered with the ACNC as a charity for the promotion of education.

The body exists primarily to:

• provide amenities and services to Students and Members;

• to further the welfare of Students and Members;

• to be the main social cultural and support centre for students

• to represent the interests of the students

The entity provides a diverse range of services to students and members. Those services include:

a. academic advocacy;

b. provision of grants and loans to students In need.

Offering welfare initiatives and grants lo students in need is a major part of the education entity's activities.

The Constitution prohibits distributions to members, and has an appropriate winding up clause.

Relevant legislative provisions

Section 50-50(2) of the Income Tax Assessment Act 1997

Reasons for decision

Summary

The proposed sale of the entity during the course of winding up and the transfer of surplus assets on winding up to an education not-for-profit will not result in a breach of section 50-50(2) of the ITAA 1997.

Detailed reasoning

The Table in item 1.1 of section 50-5 of the ITAA 1997 includes 'registered charity' as an entity that is exempt from income tax subject to certain special conditions. The special conditions are included in sections 50-50 and 50-52 of the ITAA 1997.

Section 50-50 of the ITAA 1997 states as follows:

50-50(1) An entity covered by item 1.1 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;

and the entity satisfies the conditions in subsection (2).

Subsection 50-50(2) states as follows:

The entity must:

(a) comply with all the substantive requirements in its governing rules; and

(a) apply its income and assets solely for the purpose for which the entity is established.

The entity is considering winding-up. During the course of winding-up it will either:

(b) sell its business to a third party for market value; or

(c) if a buyer cannot be found, deal with any assets of the business under its Constitution.

The entity satisfies paragraph 50-50(1)(a) of the ITAA 1997 as it is an Australian resident company that incurs its expenditure and pursues its objective of providing benefits and support to a community of students.

Regarding the special condition of paragraph 50-50(2)(a) of the ITAA 1997, Taxation Ruling TR 2015/1 - Income tax: special conditions for entities whose ordinary and statutory income is exempt (TR 2015/1) states at paragraph 8:

Three questions must be considered to determine whether an entity satisfies the governing rules condition:

• What are the 'governing rules' of the entity?

• What are the 'substantive' requirements in the entity's governing rules?

• At what time must the entity comply with all of the substantive requirements in its governing rules?

Paragraph 9 of TR 2015/1 states:

The 'governing rules' of an entity are those rules that authorise the policy, actions and affairs of the entity. That is, governing rules of an entity consist of the rules that direct:

• What the entity is required and permitted to do, and

• What those, who control the entity, are required and permitted to do in respect of the entity.

TR 2015/1 elaborates at paragraph 18 that the substantive requirements of an entity's governing rules are those that define the rights and duties of the entity and which include rules such as those that give effect to the object or purpose of the entity, relate to the non-profit status, and relates to the winding up of the entity.

The constitution contains these rules.

The entity plans to distribute any surplus assets (whether those assets consist of cash from the sale of the business, or the business assets themselves).

The entity's constitution states:

In the event of the Company being (sic) wound up any assets remaining after the Company being wound up, any assets remaining after the Company's liabilities have been discharged and the costs and expenses of winding up have been paid shall be transferred to another organisation or organisations that:

• has objects similar to the Company's Objects;

• is not carried on for the profit or gain of its individual rnembers, and

• that has rules that prohibit the distribution of its income amongst its members to the extent of the prohibition.

Regarding the special condition in paragraph 50-50(2)(b) of the ITAA 1997, Taxation Ruling TR 2015/1 states at paragraph 22 that:

The income and asset condition requires an entity to 'apply its income and asset solely for the purpose for which the entity is established'.

Two conditions must be considered to determine whether an entity satisfies the income and assets condition, namely

• what is the purpose for which the entity is established; and

• has the entity applied its income and assets solely for the purpose for which the entity is established?

Paragraph 24 of TR 2015/1 explains the "purpose for which the entity is established" as follows:

The purpose for which the entity is established is determined by a consideration of all of the features of the entity. The main factors to be considered are the objects in the entity's constituent documents, and the activities of the entity after its formation, up to the time at which the income and assets condition is applied. Other factors include policies and plans, administration, finances, history and control, and any legislation governing the operation of the entity.

The entity' purpose or object is stated in its constitution.

The second part of the income and asset condition, namely whether the entity has applied its income and assets solely for the purpose for which it is established, must also be considered.

Paragraph 30 of TR 2015/1 explains the meaning of 'apply as follows:

The requirement that an entity must 'apply' its income and assets means that an entity must make use of all of its income and assets, solely for the purpose for which the entity is established.

Paragraph 31 of TR 2015/1 states that:

… An entity may use some of its income to acquire assets which, in future, will produce income for its purpose or purposes, and may accumulate some of its income for later distribution

However, the income and asset must exclusively or only apply for the purpose for which it is established and this test is applied continuously throughout the income year.

The Constitution states:

The assets and income of the Company shall be applied solely in furtherance of its objects and no portion shall be distributed either by way or divided or otherwise directly or indirectly to a Member except as bona fide compensation for services rendered to the Company or expenses incurred on behalf of the Company

The entity is not deviating from its objects nor is it applying its income or assets for purposes other than for which it was established, namely supporting the welfare of students and members by distributing any surplus to the education entity on winding up.

It is considered that the entity will comply with the substantive requirements in its governing documents and apply its income and assets solely for the purpose for which it is established as the entity has similar objects, in that it is established for the welfare of students and members. Additionally, its non-profit clause also requires that the entity not to be carried on for the profit or gains of its individual members and both entities are registered charities and endorsed as exempt from income tax under Subdivision 50-B of the ITAA 1997.

Conclusion

The proposed sale of the entity to the education entity or the distribution of surplus assets to that entity on winding-up will not cause the entity to breach the special conditions of section 50-50 of the ITAA 1997.