Edited version of your written advice

Authorisation Number: 1012985056700

Date of advice: 23 March 2016

Ruling

Subject: Implications of sale of property

Question 1

Did the entity continue to satisfy paragraph 50-50(a) of the Income Tax Assessment Act 1997 (ITAA 1997) following the rezoning of the Property?

Answer

Yes

Question 2

Will the entity continue to satisfy paragraph 50-50(a) of the ITAA 1997 immediately following the sale of the Property to a third party?

Answer

Yes

Question 3

Will the entity continue to satisfy paragraph 50-50(a) of the ITAA 1997 following the sale of the Property while the sale proceeds are retained in an Australian bank account?

Answer

Yes

Question 4

Will the entity continue to satisfy paragraph 50-50(a) of the ITAA 1997 following the single transfer of proceeds from the sale of the Property from Australia to the overseas head entity either:

(a) Directly from the purchaser; or

(b) From the entity's Australian branch, as an intra-entity transfer?

Answer

Yes

Question 5

Will the entity continue to satisfy paragraph 50-50(a) of the ITAA 1997 following the repatriation of proceeds from the Australian branch to the overseas head entity over a period of years whereby the amount repatriated each year does not, in combination with all other expenditures the entity's Australian branch taken to be outside Australia, cause those expenditures to represent more than 50% of the total expenditures of the entity's Australian branch?

Answer

Yes

Question 6

Will the proposed transaction as a whole, or any other fact referenced in this ruling application cause the entity to cease to satisfy the "in Australia" conditions contained in paragraph 50-50(a) of the ITAA 1997?

Answer

No

This ruling applies for the following periods

Income years ended 31 March 2015 - 2020

The scheme commences on

1 April 2014

Relevant facts and circumstances

The head overseas entity is an exempt charity overseas.

The head overseas entity undertakes various trading activities around the world, including in Australia.

It maintains a large property portfolio to support its activities, one of which is the Property.

Status in Australia

The entity operates in Australia through a branch office and has done so for many years.

It is registered with the Australian Securities and Investments Commission (ASIC) and is registered as a charity with the ACNC. As such, the entity is a "registered charity" for the purposes of Item 1.1 of the table in section 50-5 of the ITAA 1997.

The entity is further endorsed as an income tax exempt entity in Australia by the Commissioner in accordance with Division 50 of the ITAA 1997.

The entity has approximately 150 full time, part time and casual employees in Australia. It operates in all Australian states and territories as well as countries overseas.

The entity's head office in Australia is located at the Property. The Property is both an office space and warehouse.

Special purpose financials statements were provided with the Ruling application, outlining the entity's gross income and expenditure for the relevant year.

Expenditure for the relevant financial year reports that XX% of expenditure was considered to be in Australia. Expenditure was comprised of:

(a) Employee expenses - all staff are employed in Australia.

(b) Interest payments. These finance amounts are incurred entirely within Australia.

(c) other expenses

Each year, the entity's Australian branch seeks to "distribute" its surplus profits to its overseas head entity. This amount may vary from year to year.

Rezoning

A few years ago, the relevant State Government rezoned the area on which the Property is situated to a Capital City Zone.

The rezoning of the land resulted in a significant increase in the value of the Property; however rent paid by the entity to its overseas head entity did not change significantly at this time.

Sale of the Property

The overseas head entity is proposing to sell the Property. The change in zoning has meant that the area is increasingly becoming incompatible with the entity's usage of the Property and carrying on of its charitable purpose.

It is anticipated that a contract of sale will be signed within the next few months.

The contract of sale will be entered into between the overseas head entity as vendor and the prospective purchaser and will be on terms and conditions negotiated with the prospective purchaser as part of the bidding process for the Property.

Leaseback

In order to facilitate the entity remaining in the Property in the immediate future, a leaseback of the Property is anticipated.

Under this arrangement, and subject to the purchaser's agreement, the entity is proposing to enter into a short - medium term lease with the purchaser, with an option in 6 months to surrender if requested. It is also anticipated that the lease will include option terms to extend the lease beyond its initial term, if required.

Rental payments under the new lease are currently anticipated to be consistent with the occupancy expenses currently being paid by the entity's Australian branch to its overseas head entity.

Post sale activities

Following the sale of the Property, it is expected that the entity will continue to incur expenditure in Australia and is considering extending its activities in Australia further.

The entity will also incur expenditures including:

(a) rental payments in Australia as a consequence of the leaseback payable to the purchaser as well as any future rental and premises payments to provide for the Australian office;

(b) possible acquisitions of other business or premises.

While the entity may retain a portion of the proceeds of the sale of the Property in Australia, it is also expected that a significant portion of the proceeds of the sale will be remitted to the overseas head entity to support its other (non-Australian) activities.

The entity has not yet determined how it will deal with the proceeds from the sale of the Property. The current approaches being contemplated are as follows:

(a) To remit all or a substantial part of the funds in a single transfer to the overseas head entity. This transfer of funds may occur by way of either:

(i) The purchaser paying the funds directly into the overseas account; or

(ii) By way of an intra-entity transfer from the entity's Australian branch.

(b) Alternatively, the entity's Australian branch may remit funds over time to the extent funds are regarded as surplus to the needs of the Australian business. The Repatriation Schedule will be determined having regard to the expenditure of the Australian business over the previous financial years and taking into account the budget forecast proposed for the business for the coming financial years. The amount repatriated each year will be managed so as not to exceed 50% of the expenditure of the entity's Australian branch for any financial year.

Relevant legislative provisions

Section 50-5 of the ITAA 1997

Section 50-50 of the ITAA 1997

Reasons for decision

The entity is a "registered charity" for the purposes of Item 1.1 of the table in section 50-5 of the ITAA 1997.

Paragraph 50-50(a) of the ITAA 1997 provides special conditions for item 1.1:

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.

There is currently no clear guidance on what "principally in Australia" exactly means. Taxation Ruling TR 2001/11 (now withdrawn) provided that:

The incurring of expenditure and pursuit of objectives must be principally in Australia. The term 'principally' is not defined but less than 50% would not meet this requirement.

TR 2001/11 was withdrawn partly because it did not deal with views expressed by the High Court in Federal Commissioner of Taxation v Word Investments Ltd (2008) 236 CLR 204; [2008] HCA 55 regarding the interpretation of the phrase 'pursues its objectives principally in Australia'. Whilst that case is not directly on point with the facts of this ruling, the decision in that case does indicate that this term may be given a wider application than previously considered.

The entity has a physical presence in Australia. It operates from its head office at the Property, also used as a warehouse, and also operates in all other states and territories of Australia. The financial statements and other documentation provided with the Ruling application evidences that the entity's Australian branch incurs its expenditure and pursues its objectives principally in Australia. This requirement needs to be met for each income year due to the periodic operation of Division 50 of the ITAA 1997.

Question 1

Summary

The entity continued to satisfy paragraph 50-50(a) of the ITAA 1997 after the rezoning of the Property.

Detailed reasoning

The entity has advised that its head office in Australia is located at the Property. This property was rezoned to a Capital City Zone by the relevant State Government.

The rezoning of the land resulted in a significant increase to the value of the Property.

The occupancy expenses paid to the overseas head entity for "rent" of this Property did not materially increase following the increase in value of the Property as a consequence of the rezoning.

Since the rezoning, the entity has continued to use this Property as its Australian head office and also as a warehouse. None of its other activities within Australia have been affected by the rezoning of the Property.

It is considered that the rezoning of the Property will not cause the entity to fail paragraph 50-50(a) of the ITAA 1997. The entity has retained its physical presence in Australia and, to that extent, continued to incur expenditure and pursue its objectives principally in Australia.

Question 2

Summary

The entity will continue to satisfy paragraph 50-50(a) of the ITAA 1997 immediately following the sale of the Property to a third party.

Detailed reasoning

As a result of the rezoning of the Property, the entity's overseas head entity is proposing to sell the Property. This is partly due to the fact that the nature of the area has changed substantially from when it was purchased and is no longer compatible with the entity's usage of the Property.

After the proposed sale, it is anticipated that the entity will enter into a leaseback agreement with the Purchaser, allowing it to remain in the Property for a further period of time, and therefore enable it to continue to conduct its current activities from the Property, while allowing the entity sufficient time to find an alternate suitable location from which to continue to conduct its business. Rent will be paid to the purchaser in accordance with the leaseback.

It is considered that the sale of the Property will not cause the entity to cease to satisfy paragraph 50-50(a) of the ITAA 1997. The entity will retain its physical presence in Australia and, to that extent, continue to incur expenditure and pursue its objectives principally in Australia.

Question 3

Summary

The entity will continue to satisfy paragraph 50-50(a) of the ITAA 1997 following the sale of the Property while the sale proceeds are retained in an Australian bank account.

Detailed reasoning

For the reasons given above, it is considered that the entity will continue to satisfy paragraph 50-50(a) of the ITAA 1997 following the sale of the Property while the sale proceeds are retained in an Australian bank account.

The sale of the property does not affect the entity retaining its physical presence in Australia and, to that extent, continuing to incur expenditure and pursuing its objectives principally in Australia.

Question 4

Summary

The entity will continue to satisfy paragraph 50-50(a) of the ITAA 1997 following a single transfer of proceeds from the sale of the Property from Australia to overseas.

Detailed reasoning

As previously mentioned, the Property is owned by the overseas head entity. The entity's Australian branch has always paid "rent" to the overseas head entity for the use of this Property.

On the proposed sale of this property, it is likely that there will be a single transfer of the sale proceeds from Australia to the overseas head entity, either directly from the purchaser, or from the entity's Australian branch as an intra-entity transfer.

The underlying question is whether or not the repatriation of sale proceeds would be considered an "expenditure" of the entity in Australia, and whether it would cause the entity not to satisfy its expenditure being incurred principally in Australia.

The Commissioner does not consider that the repatriation of sale proceeds overseas will be "expenditure" incurred by the entity in Australia for the purposes of paragraph 50-50(a) of the ITAA 1997.

The overseas head entity was the owner of the Property, and the repatriation of sale proceeds is simply a return of its original capital investment in the Property, as well as any profit associated with that investment.

The entity wishes to continue their activities in the current Property by way of a leaseback agreement with the Purchaser. The entity's Australian branch will therefore continue to pay rent for the Property after the sale; however the rent will be to the Australian purchaser, rather than to overseas head entity. It can be seen therefore, that the sale of the property will in fact be likely to increase expenditure incurred in Australia by the entity whilst the leaseback agreement is in place. The entity's activities at the Property, and in other locations within Australia, will not change as a result of the sale.

The sale of the Property, and repatriation of the proceeds of that sale as a one-off payment or transfer, does not therefore affect the entity retaining its physical presence in Australia and, to that extent, continuing to incur expenditure and pursuing its objectives principally in Australia.

Question 5

Summary

The entity will continue to satisfy paragraph 50-50(a) of the ITAA 1997 if the repatriation of proceeds from the sale of the Property occurs over a number of years.

Detailed reasoning

If the sale proceeds are not repatriated in a single transfer (as per question 4), then the entity may instead choose to repatriate the sale proceeds overseas over a number of years. The amount repatriated each year will not, in combination with other expenditures of the entity's Australian branch, cause those expenditures to represent more than 50% of the total expenditures of the entity's Australian branch.

As already discussed, the Commissioner does not consider that the repatriation of sale proceeds will be "expenditure" incurred by the entity for the purposes of paragraph 50-50(a) of the ITAA 1997.

The overseas head entity was the owner of the Property, and the repatriation of sale proceeds is simply a return of its original capital investment in the Property, as well as any profit associated with that investment.

The Commissioner considers that this remains the correct position whether or not the entity's Australian branch repatriates the sale proceeds in a one-off transfer or whether they choose to repatriate the sale proceeds over a number of years, having regards to their own financial position when doing so.

The sale of the Property and repatriation of the proceeds of that sale over a number of years does not affect the entity retaining its physical presence in Australia and, to that extent, continuing to incur expenditure and pursuing its objectives principally in Australia.

Question 6

Summary

The proposed transaction will not cause the entity to cease to satisfy paragraph 50-50(a) of the ITAA 1997.

Detailed reasoning

All the individual steps of the proposed transaction have been discussed above. Considered either separately or as a whole, there is nothing in the proposed transaction that will affect the entity retaining its physical presence in Australia and, to that extent, continuing to incur expenditure and pursuing its objectives principally in Australia.