Edited version of your written advice

Authorisation Number: 1013000734682

Date of advice: 28 April 2016

Ruling

Subject: Fringe benefits tax

Question 1

Will the contributions made by Company A on behalf of its employees to Trust B be exempt benefits under section 58PA of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer:

Yes.

Question 2

Will the distribution of, or creation of a present entitlement to, income of Trust B to Company A give rise to a proportionate amount of assessable income for Company A?

Answer:

Yes.

Question 3

Will Company B in its capacity as trustee of Trust B be assessable under section 98, 99 or 99A of the Income Tax Assessment Act 1936 (ITAA 1936) for net income, in an income year, to which Company A has been distributed or is presently entitled to the corresponding share of the income of the trust estate?

Answer:

No.

Question 4

Will any donations made by the members to Company A for its purposes be assessable income of Company A?

Answer:

No.

Question 5

If the answer to question 4 is yes, can Company A claim tax deductions for expenditure incurred for its purposes?

Answer:

Not applicable, the answer to question 4 is no.

Question 6

Is Company A carrying on an enterprise for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer:

Yes, Company A is carrying on an enterprise for the purposes of the GST Act.

Question 7

Will cash distributions from Trust B be consideration for taxable supplies made by Company A?

Answer:

No, cash distributions from Trust B will not be consideration as Company A has not made any supply to Trust B.

Question 8

Will any donations made by the members be consideration for taxable supplies made by Company A?

Answer:

No, donations made by the members to Company A will not be consideration for taxable supplies.

Question 9

Will acquisitions made by Company A, in engaging third party contractors to provide goods and services which are taxable supplies made by those contractors, be credible acquisitions for Company A?

Answer:

Yes, acquisitions made by Company A in engaging third party contractors to provide goods and services which are taxable supplies, will be creditable acquisitions for Company A if all of the criteria in section 11-5 of the GST Act are satisfied.

Question 10

Is Company A's total input tax credit entitlement (for all acquisitions made by it in the course of carrying on its enterprise) impacted by the receipt of trust distribution from Trust B and/or donations from the members?

Answer:

No, Company A's entitlement to input tax credits will not be impacted by the cash distributions from Trust B or the donations from the members.

This ruling applies for the following periods:

Fringe Benefits Tax

Year ended 31 March 2016

Year ended 31 March 2017

Year ended 31 March 2018

Income Tax

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Goods and Services Tax

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

The scheme commences on:

1 July 2015

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Background

Company B acts as trustee for Trust A and Trust B.

The members of Trust A and shareholders of Company B were (and remain) employer associations and unions.

Trust A was established to receive contributions from employers, with funds to be used for various purposes, but particularly to fund redundancy entitlements.

With the introduction of 'approved worker entitlement fund' legislation in the Fringe Benefits Tax Assessment Act 1986 (FBTAA), Trust B was established, because Trust A did not comply with the requirements to be an approved worker entitlement fund.

Trust B was endorsed as an approved worker entitlement fund under the FBTAA.

Trust A has not received any additional contributions since the change in tax law and the establishment of Trust B. However, it retains funds received prior to that time.

In recent years Trust A has, consistent with its terms, distributed income amounts to its members.

Trust A

Trust A has an established practice of applying the full amount of its annual income to the members. The members have collectively agreed to use those moneys to fund benefits to employees and members.

The arrangement set out in the Members' Deed provides that the members will use and apply the income amounts they receive from Trust A to fund benefits collectively. This is administratively achieved by holding the income amounts in an account within Trust A.

The members allow the income amounts to be held as part of the account under a debtor/creditor relationship rather than a trustee/beneficiary relationship. That is, the funds are currently held by Trust A but a loan is recorded as owing by Trust A to each of the members.

The members agree for particular uses of the funds and the trustee of Trust A arranges and enters into contracts with third parties to provide benefits to members, as agent for each of the members.

As a result, any entitlement to input tax credits is currently, and has historically been, with the members (as principal) rather than the trustee of Trust A.

The Parties to the Member's Deed are unions and employer associations.

Trust B

Each year, the income of Trust B is accumulated and tax is paid on the accumulated income by the trustee.

Trust B has historically distributed a portion of its after tax income to the members, however:

• these amounts are not distributed as a cash payment to the members,

• the members have agreed for these amounts to be held in an account within Trust A which is administered by the trustee of Trust A, and

• a 'cash amount' (ie bank deposit) equal to the amount of the distribution from Trust B to the members is transferred by Trust B directly to Trust A with corresponding loan liabilities in the accounts of Trust B, recording the amount owed to the members.

When the members agree for the trustee of Trust A, in its capacity as agent of each member, to spend amounts represented in the account, the obligation of the members to reimburse the trustee of Trust A for the expenditure is offset against the loan balance between each member and Trust B.

Members of Trust B are also employer associations and unions.

Proposed restructure

Company A is a company limited by guarantee.

The members are the subscribing members of Company A.

Company A is registered for GST.

Company A's constitution prohibits the payment of any profits or surplus to its members during operation or upon winding-up.

The income and property of Company A must only be applied to the promotion of its objects.

It is intended that Company A will be the primary entity that provides the benefits to employees in the relevant industries and for other industry purposes and that this will replace the arrangements described above in relation to Trust A.

The scope of the benefits provided by Company A will be to current union members primarily (i.e. individual employees who are members of the union rather than members of Company A itself). For example: ambulance cover, funeral benefit, travel insurance, counselling and dental benefits. There are also some general funds applied for the broader benefit of the industry.

The services to individuals that are members of unions, employees of the industry or the industry generally will be provided at no cost to the recipient.

Trust B will retain some funds to meet its obligations of redundancy entitlements and other entitlements. Any funds surplus to its requirements will be distributed to Company A as pre-tax income distributions.

Distributions by Trust B to Company A will be cash distributions.

There will not be any transfers of property or in specie distributions to satisfy any distributions made by Trust B to Company A.

There will be no conditions on distributions from Trust B to Company A. Company A will not have to do, or refrain from doing, anything to receive the trust distribution.

There is no requirement or obligation for members to contribute any funds to Company A in the future, nor is there expected to be any ongoing contributions by way of subscriptions, donations or otherwise.

However, to minimise the transition period in which Trust A arranges for expenditure on industry purposes, which is then offset against amounts owing to it by the members, the members may donate the amount equal to their receivables to Company A. This would then facilitate the transfer of the remaining balance of the welfare fund to Company A. This donation would have the characteristics and features that characterise the donation as a 'gift' (Taxation Ruling TR 2005/13 Income tax: tax deductible gifts - what is a gift).

Company A will have a small number of employees. These employees will be involved in the administration of the funds received and in engaging third party contractors and suppliers to provide the industry services for the benefit of the members.

Under the terms of their employment contract Company A will be required to make contributions on behalf of its employee to Trust B.

Company A will be one of many contributors to Trust B.

Trust B will admit Company A as a Participating Employer, as specified in the objects of Company A.

Assumption

The proposed restructure of arrangements as described above will be carried out accordingly.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 58PA

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 subsection 6-10(2)

Income Tax Assessment Act 1997 subsection 6-15(1)

Income Tax Assessment Act 1936 subsection 95A(2)

Income Tax Assessment Act 1936 section 97

Income Tax Assessment Act 1936 paragraph 97(1)(a)

Income Tax Assessment Act 1936 section 98

Income Tax Assessment Act 1936 section 99

Income Tax Assessment Act 1936 section 99A

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-10

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-10(4)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 subsection 11-15(1)

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

A New Tax System (Goods and Services Tax) Act 1999 section 11-99

Reasons for decision

Question 1

Summary

Contributions made by Company A on behalf of its employees to Trust B will be exempt benefits under section 58PA of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Detailed reasoning

Section 58PA of the FBTAA states:

If:

(a)  a person makes a contribution to an approved worker entitlement fund; and

(b) the contribution is made under an industrial instrument; and

(c) the contribution is either:

(i) made for the purposes of ensuring that an obligation under the industrial instrument to make leave payments (including payments in lieu of leave) or payments when an employee ceases employment is met; or

(ii) for the reasonable administrative costs of the fund;

the contribution is an exempt benefit.

Therefore, a contribution by Company A to Trust B will be an exempt benefit under section 58PA of the FBTAA if:

a. Trust B is an approved worker entitlement fund, and

b. the contribution is made under an industrial instrument and made to make leave payments (including payments in lieu of leave) or payments when an employee ceases employment is met.

These requirements are considered below.

a. Is Trust B an approved worker entitlement fund?

Trust B is an approved worker entitlement fund under the FBTAA. Therefore, this requirement will be met.

b. Is the contribution made under an industrial instrument and made to make leave payments (including payments in lieu of leave) or payments when an employee ceases employment?

The relevant employees of Company A will be employed under an employment contract, and Company A will enter into an enterprise agreement with the relevant employees that will prescribe that there will be an obligation to make relevant contributions to Trust B.

Therefore, the Commissioner is satisfied that this requirement will be met.

Conclusion

A contribution made by Company A to Trust B will be an exempt benefit under section 58PA of the FBTAA.

Question 2

Summary

The distribution of, or creation of a present entitlement to, net income of the Trust B to Company A will give rise to a proportionate amount of assessable income for Company A.

Detailed reasoning

Where a resident beneficiary of a trust estate who is not under a legal disability is presently entitled to a share of the income of the trust estate, paragraph 97(1)(a) of the ITAA 1936 includes in the assessable income of the beneficiary, their share of the net income of the trust.

A beneficiary's share of the net income of a trust estate is calculated by reference to the proportion of the income of the trust estate to which the beneficiary is presently entitled: Taxation Determination TD 2012/22: Income tax: for the purposes of paragraph 97(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) is a beneficiary's share of the net income of a trust estate worked out by reference to the proportion of the income of the trust estate to which the beneficiary is presently entitled? (TD 2012/22)

TD 2012/22 states:

1. Yes. To determine the share of net income of a trust estate to be included in a beneficiary's assessable income under paragraph 97(1)(a) of the ITAA 1936, the beneficiary must:

(i)  calculate how much of the income of the trust estate they are (or are taken to be) presently entitled to, as percentage share of that income; and

(ii)  apply that percentage to the net income of the trust estate.

This approach is often referred to as the 'proportionate approach' to the assessment of trust net income.

2. If, in the 2010-11 or a later income year, a trust has made a capital gain or received a franked distribution to which no beneficiary is specifically entitled, the proportionate approach may also be relevant to the application of Subdivisions 115-C and 207-B of the Income Tax Assessment Act 1997 ( ITAA 1997).

3. The effect of the application of the proportionate approach in any particular case will depend on the facts and circumstances of that case, including the terms of the trust and, where relevant, any resolutions made by the trustee to appoint the income of the trust.

TD 2012/22 provides examples at paragraphs 7 - 55 to demonstrate the relevance of the trust deed and the wording of the trustee resolution to the outcome under the proportionate approach.

Where the trustee of Trust B resolves to distribute income to Company A, as a resident beneficiary that is presently entitled and not under legal disability, Company A will include in its assessable income under paragraph 97(1)(a) of the ITAA 1936 its proportionate share of the net income of Trust B. As required by TD 2012/22, the relevant provisions in the trust deed of Trust B and resolutions by the trustee of Trust B must be taken into account in working out Company A's share of the net income of the trust.

Question 3

Summary

Company B in its capacity as trustee of the Trust B will not be assessable under section 98, 99 or 99A of the ITAA 1936 in respect of the share of net income of the trust distributed to or to which Company A is presently entitled.

Detailed reasoning

Sections 98, 99, and 99A of the ITAA 1936 provide for the trustee of a trust to be assessed on the net income of the trust in certain circumstances.

Section 98 of the ITAA 1936 assesses the trustee in respect of the beneficiary's share of the net income of the trust where the beneficiary is:

• presently entitled to a share of the trust income but is under a legal disability,

• not presently entitled but is deemed presently entitled under subsection 95A(2) of the ITAA 1936, or

• presently entitled and a non-resident at the end of the income year and specified conditions are satisfied.

Sections 99 and 99A of the ITAA 1936 assess the trustee on so much, if any, of the net income of the trust estate to which no beneficiary is presently entitled, which is retained or accumulated by the trustee. Sections 99 and 99A specifically exclude income assessed to a beneficiary under section 97 of the ITAA 1936, or assessed to the trustee under section 98 of the ITAA 1936.

Section 97 of the ITAA 1936 is the primary provision under which presently entitled beneficiaries are assessed on their share of the net income of the trust estate. Where a resident beneficiary of a trust estate is not under a legal disability and is presently entitled to a share of the income of the trust estate, paragraph 97(1)(a) of the ITAA 1936 includes the beneficiary's share of the net income of the trust in their assessable income.

Where there is a distribution or creation of a present entitlement to income of Trust B to Company A, Company A as a resident beneficiary that is not under a legal disability is required by paragraph 97(1)(a) of the ITAA 1936 to include in its assessable income its share of the net income of Trust B.

Company B in its capacity as trustee of the Trust B will not be assessable under section 98, 99 or 99A of the ITAA 1936 in respect of net income of the trust that is included in the assessable income of Company A under section 97 of the ITAA 1997.

Company B in its capacity as trustee of the Trust B will not be assessed under section 98 because the requirements necessary for the operation of section 98 will not be satisfied.

Company B in its capacity as trustee of the Trust B will not be assessed under sections 99 and 99A because both sections assess the trustee on net income of the trust estate to which no beneficiary is presently, which is not the case in respect of income which has been distributed to Company A or to which Company A is presently entitled. Further, both sections 99 and 99A specifically exclude income assessed to Company A under section 97 of the ITAA 1936 from being assessed to Company B in its capacity as trustee of the Trust B.

Question 4

Summary

Donations made to Company A by its members will not be assessable income of Company A.

Detailed reasoning

Assessable income includes ordinary income under section 6-5 of the ITAA 1997 and statutory income as defined in section 6-10 of the ITAA 1997. Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary income and is not statutory income, it is not assessable income.

Subsection 6-5(1) provides that an amount is included in your assessable income if it is income according to ordinary concepts. The legislation does not provide specific guidance on the meaning of income according to ordinary concepts. However, the principles and tests for ascertaining whether a receipt is income according to ordinary concepts have been laid down by the courts over the years.

The ATO Guide Mutuality and taxable income is a guide for non-profit member based organisations that are not exempt from income tax. At page 11 it states:

The following receipts are not assessable income for tax purposes:

• mutual receipts

• receipts classified under income tax law as non-assessable income, including exempt income and non-assessable, non-exempt income.

The following example of non-assessable income is provided at page 11:

A non-profit society receives donations from both members and non-members.

The donations are non-assessable income regardless of who makes them. Donations are given voluntarily and are not income from rendering personal services, income from property or income from the carrying on of trading activities. Donations are also not specified as income under income tax law.

Statutory income is included in assessable income by a specific provision in the tax legislation (subsection 6-10(2) of the ITAA 1997). Gifts, or donations, are not included in income under a specific provision and therefore are not statutory income; as stated in the example at page 11 of the ATO Guide Mutuality and taxable income.

Under the proposed arrangement, the members may make donations to Company A as part of the transition between the current arrangement and the proposed arrangement. To this end, the members may donate the amount equal to their receivables in Trust A to Company A. Donations by the members will have the characteristics and features that characterise the donation as a gift as discussed in Taxation Ruling TR 2005/13 Income tax: tax deductible gifts - what is a gift (TR 2005/13). The donation would be voluntary and would only arise if all members agree to do so. No specific benefit would be received by the members, directly or indirectly, from making the donation and there would be no conditions attached to the donation.

Donations to Company A by its members will be non-assessable income. The donations will not be income according to ordinary concepts and will not be statutory income, and therefore, will not be included in the assessable income of Company A.

Question 5

As stated at question 4, donations from members will not be assessable to Company A; therefore this question is not applicable.

Question 6

Summary

Company A is carrying on an enterprise for the purposes of the GST Act.

Detailed reasoning

Paragraph 9-20(1)(a) of the GST Act provides that an enterprise is an activity, or a series of activities, done in the form of a business.

Paragraph 178 of Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) outlines the main indicators of carrying on a business. These include:

• a significant commercial activity;

• a purpose and intention of the taxpayer to engage in commercial activity;

• an intention to make a profit from the activity;

• the activity is or will be profitable;

• the recurrent or regular nature of the activity;

• the activity is carried on in a similar manner to that of other businesses in the same or similar trade;

• activity is systematic, organised and carried on in a businesslike manner and records are kept;

• the activities are of a reasonable size and scale;

• a business plan exists;

• commercial sales of product; and

• the entity has relevant knowledge or skill.

Paragraphs 222 and 223 of MT 2006/1 provide that activities of non-profit entities may involve trading activities and provision of services to members. The objective or outcome is not to derive profits for distribution but merely to cover expenditure and apply any surplus directly or indirectly to the benefit of the membership as a whole. Thus, a non-profit entity may conduct activities that are in a form of a business as what is relevant is the nature of the businesslike activities of the organisation, rather than its non-profit status or who it trades with.

Company A was established as a company limited by guarantee, a non-profit entity. One of its objectives is to promote the welfare and benefit of the industry. To carry out this objective, it organises:

• the provision of education and training to employees in the industry;

• the provision of chaplaincy, counselling and welfare services for participants in the industry; and

• the promotion of persons or institutions undertaking investigations or enquiries into issues which affect the industry.

It carried out the above activities in a businesslike manner and as a result is carrying on a business. Therefore, Company A is carrying on an enterprise for GST purposes.

Question 7

Summary

Cash distributions from Trust B will not be consideration for taxable supplies made by Company A as Company A has not made any supply to Trust B.

Detailed reasoning

Under section 9-5 of the GST Act, an entity makes a taxable supply if:

• it makes a supply for consideration; and

• the supply is made in the course or furtherance of an enterprise that it carries on; and

• the supply is connected with the indirect tax zone; and

• it is registered or required to be registered.

Supply is defined broadly by section 9-10 of the GST Act and includes any form of supply whatsoever. However, subsection 9-10(4) of the GST Act states that a supply does not include a supply of money unless the money is provided as consideration for a supply that is a supply of money.

Trust B will make trust distribution of any surplus fund to Company A. The distribution will only be a cash distribution and not an in species distribution. There are no conditions or obligations imposed on those distributions and Company A does not do or refrain from doing anything to receive the trust distribution.

In such a case, Company A is not making any supply to Trust B either directly or indirectly. It merely receives the cash distribution for being a beneficiary of Trust B. Thus, the cash distribution from Trust B is not consideration for taxable supplies made by Company A.

Question 8

Summary

Donations made by the members to Company A will not be consideration for taxable supplies.

Detailed reasoning

As explained above, an entity makes a taxable supply where all of the criteria under section 9-5 are satisfied.

When a member makes a monetary donation in accordance with the principles outlined in TR 2005/13 then the giving of that money to Company A is made voluntarily without receiving anything in return and Company A is not obliged to do anything or refrain from doing anything. Hence, Company A is not making any supply to the member. As a result the donation of money by the member is not consideration provided to Company A.

Question 9

Summary

Acquisitions made by Company A in engaging third party contractors to provide goods and services which are taxable supplies, will be creditable acquisitions for Company A if all of the criteria in section 11-5 of the GST Act are satisfied.

Detailed reasoning

Section 11-20 of the GST Act provides that an entity is entitled to an input tax credit for any creditable acquisition that they make.

Under section 11-5 of the GST Act an entity makes a creditable acquisition if:

a) it acquires anything solely or partly for a creditable purpose; and

b) the supply of the thing to you is a taxable supply; and

c) it provides, or are liable to provide, consideration for the supply; and

d) it is registered, or required to be registered.

Subsection 11-15(1) states that an entity acquires a thing for a creditable purpose to the extent that it acquires the thing in carrying on its enterprise.

Company A is registered for GST. When Company A acquires a taxable supply from a third party contractor, it would be entitled to claim an input tax credit for that acquisition if:

• it acquires that supply in carrying on its enterprise; and

• it provides, or are liable to provide, consideration for that supply.

Question 10

Summary

Company A's entitlement to input tax credits will not be impacted by the cash distributions from Trust B or the donations from the members.

Detailed reasoning

Section 11-99 of the GST Act outlines the special rules relating to acquisitions.

A trust distribution (cash distribution) from Trust B to Company A has no GST implications as Company A has not made any supply to or acquired anything from Trust B.

Similarly, donations (in accordance with TR 2005/13) from the members to Company A has no GST implications as Company A has not made any supply to or acquired anything from the members.

If the acquisitions that Company A makes satisfies all of the criteria in section 11-5 of the GST Act and Company A is entitled to claim input tax credits for those acquisitions, then Company A's entitlement to input tax credits is not impacted by the cash distribution it receives from Trust B or the donations it receives from the members.