Edited version of your written advice

Authorisation Number: 1013010604459

Date of advice: 11 May 2016

Ruling

Question 1

If the Taxpayer makes donations to fundraisers in Australia for charities not registered in Australia as tax exempt or as DGRs and are located outside of Australia, would the Taxpayer satisfy section 50-50(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) and hence retain its tax exempt status, if more than 50% of all the donations made by the Taxpayer are made to Australian registered tax exempt charities or DGRs?

Answer

Yes

Question 2

If the Taxpayer donates directly to charities not registered in Australia as tax exempt or as DGRs and are located outside of Australia, would the Taxpayer satisfy section 50-50(1)(a) of the ITAA 1997 and hence retain its tax exempt status, if more than 50% of all the donations made by the Taxpayer are made to Australian registered tax exempt charities or DGRs?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2016 to year ending 30 June 2020

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The Taxpayer is endorsed as exempt from income tax under Subdivision 50-B of the ITAA 1997.

The trustee company and directors of the trustee company who operate the charity all reside in Australia.

All decisions are made in Australia and all decision makers reside in Australia.

The Taxpayer's bank accounts are in Australia.

The decisions to make the expenditure (donations) are made in Australia.

The Taxpayer will make more than 50% of all its donations in Australia.

The Taxpayer will make more than 50% of all its donations to Australian organisations.

The Taxpayer will not make more than 50% of all its donations directly to charities not registered in Australia and located outside of Australia.

The Taxpayer complies with all the substantive requirements in its governing rules and applies its income and assets solely for the purpose it was established.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 50-1

Income Tax Assessment Act 1997 Section 50-5

Income Tax Assessment Act 1997 Section 50-50

Income Tax Assessment Act 1997 Subsection 50-50(1)

Income Tax Assessment Act 1997 Subsection 50-50(2)

Income Tax Assessment Act 1997 Section 50-52

Income Tax Assessment Act 1997 Section 50-75

Reasons for decision

Section 50-1 of the ITAA 1997 provides that the income of certain types of entities is exempt from income tax.

Item 1.1 of the table in section 50-5 of the ITAA 1997 provides for exemption from income tax for entities that are 'registered charities' as defined in section 995-1 of the ITAA 1997:

an entity that is registered under the Australian Charities and Not-for-profits Commission Act 2012 as the type of entity mentioned in column 1 of item 1 of the table in subsection 25-5(5) of the Act

To be exempt from income tax as a 'registered charity' under item 1.1 of section 50-5 of the ITAA 1997 an entity must meet the conditions contained in sections 50-50 and 50-52 of the ITAA 1997.

Section 50-50 of the ITAA 1997 provides:

(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)

(2) the entity must:

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

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

Section 50-52 of the ITAA 1997 provides:

An entity covered by item 1.1 is not exempt from income tax unless the entity is endorsed as exempt from income tax under subdivision 50-B.

Physical Presence in Australia and expenditure

An entity has a physical presence in Australia if it is wholly in Australia, or has a division or branch in Australia. An entity will not have a physical presence in Australia if it is present in Australia through an agent or it merely owns an investment property in Australia.

If your organisation exists, operates and incurs its expenditure solely and entirely in Australia, you meet the physical presence in Australia test.

The Taxpayer was created under a deed of settlement in the state of X in 19xx and is currently registered as a charity with an income tax exemption with ACNC.

All decisions are made in Australia and bank accounts are Australian, therefore the Taxpayer has a physical presence in Australia for the purposes of section 50-50 of the ITAA 1997.

From the facts it is considered that the Taxpayer has a physical presence in Australia.

However, the Taxpayer must pursue its objectives and incur its expenditure principally in Australia.

Principally means mainly or chiefly. Less than 50% of expenditure is not considered principally.

The pursuit of objectives in Australia can include things done offshore if they are only a means of pursuing those objectives. For example, sending employees to an offshore conference to aid their efficiency for the Australian objectives will be pursuing objectives in Australia.

Based on the information provided about its activities, less than 50 per cent of the Taxpayers expenditure will be incurred or donated to fundraisers in Australia for charities not registered in Australia as tax exempt or as DGRs and are located outside of Australia, or directly to charities not registered in Australia as tax exempt or as DGRs and are located outside of Australia.

Therefore, it is considered that the Taxpayer has a physical presence in Australia, and it is principally pursuing its objectives and incurring its expenditure in Australia.

Disregarded amounts

An organisation may still meet the physical presence in Australia test even if it does not pursue its purposes and incur its expenditure principally in Australia, to the extent it has a physical presence in Australia. This will depend on its distribution of disregarded amounts.

Disregarded amounts are amounts that the organisation receives as:

• gifts, including testamentary gifts (that is, gifts made under a will)

• proceeds from raffles, dinners, auctions, jumble sales and similar fundraising activities

• government grants.

Distributions of these amounts are disregarded when working out where the organisation pursues its objectives and incurs its expenditure.

We assume any offshore distributions are made first from any disregarded amounts that can be distributed offshore. The assumption does not apply if a disregarded amount cannot be distributed offshore. For example, government grants made only for use in Australia, or gifts of land physically in Australia, are not assumed to be distributed offshore.

The effect of this assumption is that offshore distributions can be made, up to the total of these amounts, without affecting your entitlement to income tax exemption.

Based on the fact that the Taxpayer will incur its expenditure principally in Australia we have not considered whether the physical presence test is required to meet through the disregarded amounts under section 50-75 of the ITAA 1997.

Conclusion

As the Taxpayer will not distribute more than 50% of its donations to entities who are located outside Australia and/or directly to entities located outside Australia, it will be considered to have incurred its expenditure and its objectives principally in Australia and therefore satisfies 50-50(1)(a) of the ITAA 1997.

The Taxpayer satisfies paragraphs 50-50(2)(a) and (b) of the ITAA 1997 as it complies with all the substantive requirements in its governing rules and applies its income and assets solely for the purpose it was established.

The Taxpayer also complies with section 50-52 of the ITAA 1997 as it is endorsed as exempt from income tax under Subdivision 50-B of the ITAA 1997.

As a result, the Taxpayer will maintain its Income Tax Exempt status under section 50-1 of the ITAA 1997.